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Asian Shares Fall, Dollar Drifts Ahead of Fed - (Reuters)

TOKYO (Reuters) - Asian shares withered and the dollar lurked just above its recent lows on Tuesday, as investors awaited confirmation the U.S. Federal Reserve will stay the course with stimulus at its policy meeting this week.

European markets were tipped to open not far from their previous closes, with financial spreadbetters predicting Britain's FTSE 100 .FTSE to open down about 0.3 percent; Germany's DAX .GDAXI, which touched a fresh record high of 9,017.95 points on Monday, to open down about 0.1 percent; and France's CAC 40 .FCHI to open steady to slightly higher.

Australian shares ended down 0.5 percent after surging 1 percent on Monday to a new five-year high, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down about 0.3 percent in late trade.

Japan's Nikkei stock average .N225 gave up 0.5 percent, but ended off its session lows.

Economists and market participants expect no change to the Fed's $85 billion monthly asset purchase program at its two-day meeting ending on Wednesday. Most predict the central bank to delay any stimulus tapering until at least March.

Monday's U.S. economic data offered nothing to alter this view. U.S. manufacturing output barely rose in September and contracts to buy previously owned homes fell the most in nearly 3-1/2 years, showing economic activity was on a weak footing even before the 16-day partial shutdown of the U.S. government, which is expected to trim fourth quarter growth.

"The soft industrial production report, plus the larger-than-expected decline in pending home sales, is unlikely to give comfort to FOMC policymakers who await stronger economic data before initiating tapering," strategists at Barclays wrote in a client note.

U.S. S&P E-mini futures were down about 0.1 percent, after the S&P 500 Index .SPX closed at a record high in New York on Monday.

One factor that had weighed on investors' minds in recent sessions faded on Tuesday, as China's money rates stabilized after the central bank resumed open market operations for the first time since October 15. This eased worries that the authorities were preparing to dramatically tighten monetary policy.

"With Tuesday's injection, people are even more confident that the government will not change its neutral monetary policy for now, although the PBOC will stick to its pro-tight stance in managing the liquidity," said a senior trader at a Chinese state-owned bank in Beijing.

India's central bank took another tightening step on Tuesday, raising its policy interest rate for the second time in as many months as it warned that inflation is likely to remain elevated for the rest of the fiscal year.

DOLLAR INDEX EDGES AWAY FROM 9-MONTH LOW

The dollar index, which tracks the greenback against a basket of six major currencies, added about 0.1 percent to 79.344 .DXY, holding above a nine-month low of 78.998 hit on Friday.

The dollar shed about 0.1 percent against its Japanese counterpart to 97.54 yen, but managed to stay above a more than two-week low of 96.92 yen hit on Friday, according to Reuters data.

The Bank of Japan also meets this week, and is expected to maintain its monetary policy on Thursday as it aims for its target of 2 percent inflation in two years.

The International Monetary Fund's top official for Asia said on Tuesday that an increase in Japanese foreign direct investment and bank lending to Asia has helped counteract capital outflows triggered by expectations that the Fed would taper its asset-buying program.

The euro was nearly flat on the day at $1.3787, not far from Friday's high of $1.3832, its highest level since November 2011.

The Australian dollar tumbled after Australian central bank governor Glenn Stevens said it was likely the Aussie would fall materially in the future, given the country's declining terms of trade. That shift would be welcomed by Australian exporters.

The Aussie last stood at $0.9508, down 0.6 percent and well off a five-month high of $0.9758 last Wednesday.

In commodities trading, spot gold was slightly higher on the day at $1,352.96 an ounce after rising to a five-week high of $1,356.50 on Monday.

Copper fell about 0.4 percent to $7,165 in the wake of the downbeat U.S. economic data.

U.S. crude futures edged down about 0.2 percent towards $98 a barrel but held within sight of a one-week high as a sharp drop in Libyan oil exports rekindled worries over supply. Brent crude slipped 0.4 percent to $109.13 after surging $2.68 in the previous session.

Libya's crude oil exports have dropped to less than 10 percent of capacity as protests have halted operations at western ports and fields.

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